Pros and Cons of a term deposit

Are you sitting on the fence about investing in a term deposit? Deciding on a place to stash your hard earned savings can be a daunting process, but it's important to do your research and find the best option for you.

To help you decide if that’s a term deposit, we’ve rounded up the main advantages and disadvantages that come with locking your cash away for a fixed term.

Term deposit pros

Here are some of the reasons why a term deposit might be the best savings strategy for you:

  • It’s low risk. A term deposit ensures your money will earn interest at a fixed rate, for a fixed term. There’s little to no chance of losing your money, so it’s a good option for cautious savers.
  • It’s low maintenance. Once you lock your cash away in a term deposit, there’s not a lot you can do with it until the term is up. So it makes for a great out-of-sight-out-of-mind saving plan.
  • No service or startup fees! One of the best things about a term deposit is that as long as you don’t withdraw early, it’s entirely fee free.
  • Protected from slumps in the market. The fixed interest rate on a term deposit means that even if market interest rates are falling a mile a minute, your savings will keep earning the same level of interest.
  • Impulse spending control. Are you a bit of an impulse spender? Once your money is in a term deposit, hefty penalties apply for taking it out early, so it can actually help to curb bad spending habits.

Term deposit cons

But it’s not all good news. Make sure you’re aware of the pitfalls of a term deposit before making your decision. These include:

  • Your money isn’t accessible. The number one term deposit rule is that once your money is locked away, it’s hands off until the term ends! If you need to withdraw your money from a term deposit early, you’ll wind up paying a penalty fee, plus your interest rate will be reduced.
  • No extra deposits. You’ll need to make a lump sum deposit when you open your term deposit, and there’s no option to add to your savings as you go. This might be a hassle for regular savers, but one way to combat it is by having multiple term deposits with staggered maturity dates.
  • Less flexibility. A term deposit is low risk - but the flip side is that it’s not a very flexible savings option. Other products with comparable rates, such as high interest savings accounts, offer much more in terms of flexible features and options.
  • No bonus interest. Your fixed interest rate may be secure, but on the other hand, it means there’s no way to earn bonus interest on your term deposit, like there is with a savings account.
  • Rollover terms are often less competitive. If you forget to make plans for your money after your term deposit matures, it could roll over into another term. This rollover term often comes with a rock-bottom interest rate attached, and you’ll have to pay the early withdrawal penalty to get out of it.
  • Won’t benefit from rises in market. Your fixed interest rate may not look so hot if market interest rates rise and your savings are left behind in the dust.

Is a term deposit safe?

The short answer is: yes. A term deposit is a safe investment because it’s a fixed rate for a fixed term, and there’s very little chance of you actually losing money. Which is exactly what you want from a saving strategy.

But it’s also a safe investment because the Australian government guarantees deposits of up to $250,000, as long as it’s with an Authorised Deposit-taking Institution (which essentially means a bank, credit union or other financial provider.) That means that even if your bank goes belly up, you won’t lose any money.

Each ADI is guaranteed up to $250,000 for each customer - so if you’re lucky enough to be putting away more than that, you might want to think about spreading it across a couple of different banks to stay under the threshold.

Is a term deposit worth it?

That all depends on your needs and saving style, but a term deposit might be worth it if you are looking for:

  • A safe, cash only investment. A term deposit is free of the risks that come with investing strategies like playing the share market.
  • An easy way to start saving. Low maintenance and safe, a term deposit is a great way for novice savers to start out.
  • Somewhere to stash a lump sum of money you don’t need soon. Got a Christmas bonus or maybe an inheritance? If it’s not part of your day-to-day budget, a term deposit might be the perfect place to stash it away.
  • A strategy to meet set future goals. Are you saving to buy a car in three months, or for a deposit on a home loan in two years? By putting your nest egg away in a term deposit, you’ll avoid the temptation of spending it before you reach your goal.
  • A long term solution. Interest rates change all the time. If you’re looking for a long term solution that can ride the ups and downs of the market for years to come, a term deposit could be it.

Is a term deposit better than a savings account?

Again, that comes down to how you’re using it. A term deposit gives you more interest rate security but a savings account is more flexible. A savings account is more accessible, but a term deposit could be the perfect product to help you resist impulse spending.

For a full comparison of term deposits vs savings accounts, check out our dedicated guide.

Find a term deposit

If all the advantages to having a term deposit have convinced you that it’s the savings strategy for you, then here’s how to find the best offer:

First, head over to our term deposit comparison page to find the best offers from across the market.

Next, narrow it down with our term deposit search tool, which will show you results applicable to your deposit amount and desired term.

And before you take the plunge, read through our term deposit customer review section to find out what real Aussies have to say about their experiences.

Compare today's top term deposits